Area Office Building Boom Seen Continuing in 1986

By Wendy SwallowJanuary 13, 1986

While the pace of office building construction is expected to ease this year in most American cities because of overbuilding, Washington's construction boom will continue, despite soft demand for office space.

Builders here say they are planning to construct nearly 15 million square feet of new office space by the end of 1986.

Only about 9 million square feet of space have been leased in each of the last two years. With the vacancy rate already at 10.6 percent, the Washington area will have a serious glut by 1988, commercial real estate industry representatives warn.

"Lenders see Washington as just about the most attractive place to invest their funds right now," said Howard Flax, senior vice president and manager of the D.C. regional office of the Abacus Group, a real estate investment company.

"Overbuilding of office space is not nearly as serious here as in other areas of the country, and lenders are still moving into Washington," said Flax. "Unfortunately, that is going to create a more serious overbuilding situation here."

In downtown Washington, where the vacancy rate is 10 percent, leasing agents reported tenants are getting generous concession packages from landlords eager to lease new space.

In many cases, they are luring tenants from older office buildings, leaving vacancies behind them.

Stephen Goldstein, vice president and head of the Washington office of Julian J. Studley Inc., a commercial leasing agency, said some tenants have been able to get free rent and cash concessions that equal as much as a full year of free rent. For a company renting 50,000 square feet of space at $30 a square foot per year, such a concession package would be worth $1.5 million.

While the ability to find tenants for new space in Washington is still considered good compared with other markets, leasing agents said they were beginning to become concerned about the increasing amount of vacant space in older buildings as tenants jump at the chance to rent new space with super deals.

"We're seeing an oversupply of previously occupied space," said John Donovan, vice president for D.C. leasing with the Oliver T. Carr Co., a large local developer. "In the central business district, it is getting to be very competitive. Some of the space is obsolete -- and by that I mean the mechanical equipment is at least 20 years old -- and some is relatively new. It is going to get harder and harder to lease the space that is old, no matter how much cosmetic work the owner does."

Donovan said that, as areas such as the West End and Pennsylvania Avenue between the White House and the Capitol become attractive to top tenants, the central business district is no longer seen by tenants as "a special space."

Goldstein estimated that 40 percent of the vacant space in downtown is in older buildings, and much of that space will be difficult to lease because it is in small chunks. Other brokers said many building owners are rehabilitating older downtown space with improvements ranging from face-liftings for lobbies to complete renovations.

Northern Virginia led the area in 1985 with 6 million square feet of new space leased. Leasing specialists said the strongest Northern Virginia markets are the close-in suburbs of Rosslyn and Crystal City, where continued growth among established defense contracting firms accounted for many of the new leases.

Tysons Corner also benefited from the expansion of defense contracting in the area, with more than 1 million square feet of space leased last year. Brokers said, however, that with nearly 2 million square feet of space available and another 5 million scheduled to be built during the next three years, Tysons could suffer from a glut.

The Herndon, Dulles and Reston area is the weakest section of the Northern Virginia market, with vacancy rates of 35 percent and 30 percent. Some leasing agents said builders have overestimated the amount of low-rise research-and-development space that could be absorbed. Other agents said the opening of the parallel lanes to Dulles would soon ease the oversupply in those areas.

Ballston, which is expecting 3.5 million square feet of new space over the next three years, is the wild card in the local real estate game, said Herb Palm, vice president for suburban leasing for the Carr Co. Because Ballston has never been an office neighborhood, Palm said, it is difficult to tell how quickly the space will be leased. Builders are hoping tenants looking for space in the Rosslyn area, which has few vacant offices, will find Ballston an attractive alternative, he added.

Montgomery and Prince George's counties have vacancy rates of about 20 percent, and tenants in both jurisdictions are getting good concession packages, leasing agents said. Builders are planning to build more than 6 million square feet of new space in the Maryland suburbs by 1988.

The General Services Administration is expecting to lease about 1 million square feet of new space in 1986. A spokesman for the National Capital Region office said most of those leases are consolidations of existing offices, meaning that government offices moving into new space will leave unoccupied old space behind.

D.C. leasing agents said they are also concerned about recent reports that the GSA plans to move large numbers of federal workers into office space in the suburbs.

"A thoughful observer would have to give that issue and the idea of government cutbacks from Gramm-Rudman some thought," said Leonard Bogorad, vice president of Real Estate Research Corp. and director of the company's D.C. regional office.

The automatic budget-cutting law could require retrenchment not only by the government, but also by Pentagon contractors, he said. "If the defense contractors were cut back, it would have a significant effect on the office space market in the city and the Washington area."